CME At The Ministerial Summit on Insurance Monday, December 8, 2014
Opening Remarks by
Dr. Ngozi Okonjo-Iweala
Coordinating Minister for the Economy
Honourable Minister of Finance
Federal Republic of Nigeria,
The Ministerial Summit on Insurance
Monday, December 8, 2014
1. Let me welcome you all to this Summit on the Nigerian insurance sector. Mr. President is very excited at the potential of this sector, and is looking forward to reviewing the outcomes of this conference.
2. Our objective today is to examine ways of invigorating the insurance industry in our country for the next decade to ensure that it contributes to our national economic growth. So I am pleased that we have many of the key actors in the industry gathered here today: insurance and re-insurance companies; insurance brokers and agents; underwriters, actuaries and loss adjusters; various consumer groups;
local and foreign investors in the sector; and finally regulators and government officials.
Economic importance of the insurance industry
3. The insurance industry is an important component of the financial system in any country. Insurance helps in mitigating risks and thereby provides utility for individuals and also for corporations. From economics, we know that risk-averse agents facing uncertainty are better off with insurance as it helps them to smoothen their consumption and also improve their planning.
4. As Finance Minister, I can tell you that a vibrant insurance industry promotes savings and investments, increases the overall financial assets in an economy and drives development of capital markets. In times of natural disasters (such as floods, hurricanes, droughts), insurance companies also help in providing financing to mitigate the social costs of catastrophes.
5. Finally, the insurance industry is a major contributor to job creation across the world. A vibrant insurance industry results in direct job creation for agents, brokers, underwriters, actuaries and so on; and also indirect jobs for many other industries whose risks are covered by the insurance industry.
6. So as you can see the insurance industry is an important sector; and moreover it is big business. In developed economies, insurance companies are large, financial players: they are among the largest institutional investors; they are major shareholders in Fortune 100
companies; they own some of the largest international banks; and they are big investors in the bond markets and private equity funds around the world.
7. For example, in Europe, we know that one of their largest insurers Allianz, is a major shareholder of Commerzbank in Germany, and also the owner of PIMCO, one of the largest investment management firms in the world with nearly $2 trillion in assets under management. In the US, some of their largest insurers such as Allstate Insurance have large investment portfolios in real estate, in infrastructure and in private equity funds valued at about $85 billion. And in the Asia-Pacific region, we have insurers such as the Great Eastern Life Assurance (of Malaysia) which employ more than 21,000 agents in Malaysia alone, and also has operations in Singapore, Brunei, Indonesia, China and Vietnam.
Nigeria’s insurance industry
8. In Nigeria, our insurance industry consists of the life insurance segment (about 1/4) and the non-life segments (about 3/4). Life insurance covers products such as term life, group life policies and annuities, while the non-life segment covers policies such as motor vehicle insurance, fire, accident, marine insurance and so on. Moreover, we have 6 classes of insurance which are designated as compulsory namely: motor vehicle insurance, group life insurance, employers’ liability insurance, buildings under construction insurance, occupiers’ liability insurance and healthcare professionals’ indemnity insurance.
9. As you know, our health insurance is now administered separately after the NHIS Act of 1999. And our pensions are now also regulated separately by the Pensions Commission after our Pension Reforms Act (PRA) of 2004. So my discussions today will refer to our core insurance sector (life and non-life policies).
10. Our insurance sector has grown steadily in the past decade, thanks to work which has been done by NAICOM and various stakeholders gathered in this room. The total premiums have quadrupled in the past 10 years: growing from N75 billion in 2005 to more than N300 billion today.
11. Not surprisingly, there has been strong external interest in the sector with the entry of foreign investors such as Old Mutual and Sanlam from South Africa. And just last week, we all read the news that AXA of France had acquired a majority stake in Mansard Insurance for $246 million. In reporting this deal, the Wall Street Journal said:
“This acquisition is a unique opportunity for AXA to enter the largest African economy…and to get exposure to the fast- growing Nigerian retail insurance market”.
(Wall Street Journal, 28 November 2014, quoting AXA’s statement)
12. We have an insurance market filled with opportunity – and many foreign investors are going to get even more interested in the coming years. And to add to the Wall Street Journal, I think there are even more opportunities on the way as we introduce insurance products in our growing mortgage and housing sectors!
13. However, in spite of the investor interest, I believe that as Africa’s largest economy, our insurance sector must be growing even faster. In fact, when we benchmark ourselves against other emerging markets, we realize that we still have a lot of work to do. The current insurance penetration (i.e. the ratio of premiums to GDP) is only 0.4 percent in Nigeria, compared with 1.1 percent in Ghana; 3 percent in Kenya; and for the BRICS (Brazil 4 percent; Russia 1.3 percent; India 4 percent; China 3 percent; and South Africa 15 percent).
14. Moreover, for Nigeria, when you look at assets in our overall financial system, insurance also accounts for only 3 percent of total assets, compared to 12 percent from pension assets and 79 percent from banking assets. This is different from other emerging markets such as Brazil and Mexico, where insurance assets accounts for about 6 percent of total financial assets; and for India where insurance contributes about 14 percent of total financial assets!
Challenges in our insurance industry
15. If we are to harness the potential of this industry, then we need to collectively address several challenges. We all know the challenges faced in the industry, such as lack of consumer trust, a fragmented industry with some weak and insolvent players, low enforcement of compulsory insurance policies, lack of professionalism by some agents and brokers in the industry, and a general shortage of skilled professionals in the entire industry. Let me touch on some of these challenges.
16. Lack of trust consumer trust: many Nigerians are skeptical and hold a negative perception of our insurance industry; and later today we will be hearing from some representatives of consumer bodies who may share some personal experiences. To an extent, their skepticism is justified. The claims ratio in our industry (i.e. ratio of payouts to total premiums received) is one of the lowest at about 25 percent. Compare this to Kenya and South Africa where the claims ratio is about 60 percent, or the UK where it is 90 percent. So clearly, there are many insurers in our industry who are eager to take premiums, but not ready to pay when genuine claims are submitted. This practice must stop.
17. Low enforcement of compulsory insurance: a second challenge I would want to touch on is the low levels of enforcement of compulsory insurance in the country. And in this case, the regulator and most of our government agencies have more work to do. If you take the case of compulsory motor vehicle insurance (third-party liability), only 1 in 8 Nigerian cars (13 percent) have genuine insurance. Compare this to Ghana, where the compliance rate is reportedly about 60 percent. Or take the case of mandatory group life insurance for large businesses and organizations; again only a few large corporates in the oil and gas sector, the Federal Civil Service and the Police Service are compliant. Many of our CAC-registered businesses do not comply with the law.
18. Shortage of skilled professionals. There is also the third problem of a general lack of skilled professionals in the industry – from underwriters, to brokers, to regulators and so on. Am informed by NAICOM that we currently have less than 10 professional actuaries in the country! This is grossly inadequate for the type of insurance industry we want to build in Africa’s largest economy.
Lessons from Banking and Pension Reforms
19. In the past 10 years, we have had our Banking reforms which have led to the growth of Nigeria’s banks. We went through an initial phase of banking consolidation, and then introduced additional prudential measures following the recent financial crises. Today, our banking sector has grown and total banking assets are now over N24 trillion (about US$150 billion). Prior to 2005, this would have been hard to imagine!
20. Before our banking reforms, our largest banks were only a fraction of the size of the top-5 banks in South Africa; with no Nigerian bank in the top-20 banks in Africa. Today, we know have 6 Nigerian banks among the top-20 in Africa; and our banks have now spread across the African continent opening branches from Senegal to Kenya, and from London to South Africa. These banking reforms also had major impacts on our economy by driving strong growth in the amount of bank credit provided to the private sector.
21. And then in 2004, we also had reforms in the pensions industry (see Reforming the Unreformable, Chapter 4 for further discussion). In our pension reforms, we passed the Pensions Reforms Act of 2004, and gradually switched from a defined benefits scheme to a defined contributions scheme. We also provided a strong regulatory framework to allow for pension fund administrators (PFAs) to operate. Today, our pension industry has grown in leaps and bounds: from total assets of 47 billion in 2004, to about N4.4 trillion (or US$28 billion) today!
22. My prediction is that Nigeria’s insurance industry is next. And this industry is ready to take-off. Just like the banking industry reforms, we should imagine a time when our insurance industry players are strong, robust, and even begin international expansion. A time when our domestic insurers will begin to fully underwrite policies for our oil & gas and heavy infrastructure sectors; when this industry will develop skilled actuaries and underwriters who can meet the highest international standards.
A Vision for the Insurance Sector by 2020
23. So what is our vision for the sector? And where do I see this industry getting to by 2020? Let me lay out the vision for this industry – and in the afternoon, I will challenge the break-out groups to take this vision and start thinking about the operational details.
24. The first part of our vision would be to grow our gross written premiums (GWP) of N300 billion today, to N1 trillion in the next three years, and to N5 trillion within the next decade. So we should be attaining gross premiums of about $30 billion in a decade from today. Let us focus on that prize ahead and work towards that goal.
25. The second part of the vision would be to deliver jobs in this industry. The insurance sector is a powerful engine for job creation in our economy. But today, there are only about 30,000 people working in the Nigerian insurance industry. This sector should clearly be creating many more jobs for us. So the second objective of our vision would be to grow the number of direct jobs created in this industry from the current 30,000 people to 100,000 people in the
next three years, and to more than 300,000 people in the next decade.
26. Clearly, to create more jobs in this sector, we will need to invest in training and skills development for the sector to prepare our young men and women for careers in the insurance sector. And I would ask the break-out groups to think more about this in the afternoon.
27. The third part of our vision would be to widen access by growing the number of insurance policyholders in the country. We are a country of 170 million people, but with only 3 million policyholders! Knowledge, awareness and patronage of insurance products are low across the country. So let us also work to achieve a minimum of 10 million policyholders in the next three years, and 30 million policyholders in the next decade. To achieve this goal, this industry will need to think about new distribution channels for selling insurance policies – for example using mobile platforms, and also working with the CBN to identify appropriate bancassurance regulations. We will also need to think about how to extend micro-insurance and takaful insurance (Islamic-compliant insurance) to rural parts of the country especially to Nigerian farmers who are exposed to various climate risks.
28. To develop the potential of the industry, we will need to work together to address several challenges. Clearly, the Federal Government has an important role to play in this sector. We need to get better at enforcing compliance for some compulsory classes of
insurance such as for motor vehicle insurance and group life insurance. We also need to clarify various regulations, for example on bancassurance and the use of corporate agents. And we need ot work on strengthening the supervisory powers of NAICOM. But we cannot develop this sector alone. All of us stakeholders will all need to work together to realize the potential of this industry.
29. Too often, at such gatherings, we talk a lot but do not come up with concrete plans. I would like to encourage you to be open and honest in sharing your perspectives and feedback. But I would not want us to get stuck only in rehashing the difficulties but to proceed to focus on the concrete actions which can help this sector to realize its full potential.
30. I will spend the day here today, and look forward to interacting with you; and also reporting on our findings back to Mr. President.
31. Thank you very much for your attention.